EFX US - Equifax

[tol1]

I bought into the stock a while after the drop post-announcement on the data breach end of last year.

 

Equifax is one of the 3 global credit bureaus next to Experian (EXPN LN) and Transunion that was taken public fairly recently (TRU US).

 

EFX has high margins, strong recurring FCFs, high ROICs. I consider EFX as having a strong moat due to breadth of the data and analytics behind their products and the obvious concentrated market. Stock strongly depends on economic development and consumer credit development, ip in the US.

 

What is the risk here? Data breaches are common in the US; however, this breach is unique in its scale. Several litigations and lawsuits have been initiated (both in the US and UK). Precedent settlements have been sub-$200m from what I have come across in my research so far. I think the risk may go beyond a straight settlement and concern future tighter regulation of the industry plus higher ongoing security and IT costs for EFX.

 

The stock has traded up ca. 30% since the trough. Keen to hear if anyone has digged into the potential outcomes regarding:

 

i) the timing and size of settlement/s

ii) amount of customer churn due to the hack

iii) on a different note: the seemingly never ending credit cycle and its impact on the stock within the next 2-3 years.

 

[Guest Schwab711]

I can't find my notes but I think I had an estimate of roughly $500m total cost (I didn't try to guess timing) based on the Anthem's fine on a per account basis, plus cost of free fraud monitoring, plus IT additional upgrades, plus a $50m bump (I think?) due to this being such a public incident.

 

I suspect the whole ordeal will have an unnoticeable effect on revenue within a few quarters.

 

I also went long around $90.

[scorpioncapital]

I went long TRU, thinking it was a well managed competitor - was originally owned by the same Pritzker family of Chicago that sold Marmon to Buffett - and that they might win some market share in all this. But I'm not entirely certain the dynamics of the business over time. Globally credit investigation might have a different structure. I was thinking should I invest in consumer comeback via consumer credit reporting or another indirect means ...for example SYF is a play on consumer credit that uses equifax and tru products to lend money. It's an entire ecosystem and probably all hinges on consumer credit growth.

[tol1]

I can't find my notes but I think I had an estimate of roughly $500m total cost (I didn't try to guess timing) based on the Anthem's fine on a per account basis, plus cost of free fraud monitoring, plus IT additional upgrades, plus a $50m bump (I think?) due to this being such a public incident.

 

I suspect the whole ordeal will have an unnoticeable effect on revenue within a few quarters.

 

I also went long around $90.

 

You do not expect additional recurring expenses a la IT, fraud prevention etc? If I take the $25m they indicated in Q3, annualize and simply capitalize I get to $1bn in value. I would add one-time settlement costs on top of that.

 

[Guest Schwab711]

I can't find my notes but I think I had an estimate of roughly $500m total cost (I didn't try to guess timing) based on the Anthem's fine on a per account basis, plus cost of free fraud monitoring, plus IT additional upgrades, plus a $50m bump (I think?) due to this being such a public incident.

 

I suspect the whole ordeal will have an unnoticeable effect on revenue within a few quarters.

 

I also went long around $90.

 

You do not expect additional recurring expenses a la IT, fraud prevention etc? If I take the $25m they indicated in Q3, annualize and simply capitalize I get to $1bn in value. I would add one-time settlement costs on top of that.

 

 

I guess you can build it in to slightly lower operating margins going forward? They are also going to win contracts for fraud prevention or issue more credit reports as a result of this incident. I think you are over-thinking the issue at that point though. $100m in fraud prevention expense is an huge increase to EFX's budget for that department.

[Shane]

Given the fed's heavy handed approach to dealing with WFC, what is the risk that an example is made of EFX?

 

CFPB seems like they are taking a back seat, but there are other investigations to worry about.  What agency would have the ability to come down hard on EFX?

[tol1]

Given the fed's heavy handed approach to dealing with WFC, what is the risk that an example is made of EFX?

 

CFPB seems like they are taking a back seat, but there are other investigations to worry about.  What agency would have the ability to come down hard on EFX?

 

Industry is regulated by numerous regulators (see the AR extract on that) and EFX face a 50-state class-action suit. Hard to tell who is leading the efforts. I view the settlement costs not as risky as the increased ongoing opex.